Home loan arrears rise in first quarter of 2018

Mortgage delinquencies rose over the first quarter of 2018 for both owner-occupied and investment home loans, according to the latest report from Standard & Poor’s.

Arrears on home loans underlying Australian residential mortgage-backed securities (RMBS) increased by 30 basis points in the first quarter of 2018 (1Q18) from 1.07 per cent in 4Q17 to 1.37 per cent.

This equated to $128.9 billion of mortgages in arrears.

However, when comparing the quarter with the prior comparative period, the increase in arrears was marginal, at just 0.01 of a percentage point.

The peak level (derived from the highest figure recorded for total balances over $1 billion) of arrears for the country is 1.69 per cent.

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Owner-occupied mortgage arrears jumped by 28 basis points from 1.28 per cent to 1.56 per cent, while delinquencies on investor loans increased by 26 basis points from 0.93 of a percentage point to 1.19 per cent over the same period.

Mortgage arrears on non-conforming loans jumped by 11 basis points, from 4.08 per cent in 4Q17 to 4.19 per cent in 1Q18.

On a state-by-state basis, home loan arrears were highest in Western Australia, rising from 2.08 per cent to 2.71 per cent over the quarter, followed by the Northern Territory (1.69 per cent to 2.42 per cent), Queensland (1.43 per cent to 1.71 per cent), South Australia (1.34 per cent to 1.48 per cent), Tasmania (1.00 per cent to 1.36 per cent), Victoria (0.97 of a percentage point to 1.21 per cent), New South Wales (0.81 of a percentage point to 1.02 per cent) and the Australian Capital Territory (0.64 of a percentage point to 0.68 of a percentage point).

Despite the nationwide rise in arrears, S&P noted that it expects the delinquency rate to remain stable in the short to medium term, but it noted the spike in arrears over 90 days.

“We expect arrears on the loans underlying Australian RMBS portfolios to remain relatively unchanged in the short to medium term, given the current stability in interest rates and employment conditions,” the ratings agency noted.

“However, we believe the severe arrears category of loan repayments that are more than 90 days late is an important indicator. Severe arrears have increased during the past year, reflecting macroeconomic trends of underemployment and sluggish wage growth, in our opinion.

“These conditions have affected the resource states most strongly.”

The ratings agency added that it does not expect the rise in arrears to drive up the default rate.

“Arrears rose in most states in Q1, but we believe the rise is unlikely to lead to materially higher default rates or lowered ratings in the coming year.

“This is because employment conditions are likely to be positive and most RMBS portfolios have well-seasoned loans with modest loan-to-value (LTV) ratios.”

Further, the S&P report revealed that prepayment rates on prime mortgages dropped over the quarter, from 20.36 per cent to 17.72 per cent, with prepayment rates on non-conforming loans also falling from 30.52 per cent to 25.99 per cent over the same period.

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